The big gold opportunity as Bank fires QE gun again

Smith & Williamson's Ani Markova expects the gulf between bullion and gold shares to close and believes the price gold has a chance of hitting $2,500.

Markova aired her views before the Bank of England extended its quantitative easing programme by £50 billion today, which analysts believe will continue to be supportive to the gold price as investors seek a shield from inflation.

Marcus Grubb, the managing director of the World Gold Council, underlined the dynamic.'The move [QE] is just the latest in a series of liquidity-boosting measures undertaken globally in recent months,' Grubb said.  

'As a time-tested store of value which cannot be artificially devalued by policy makers, as well as a proven hedge against inflation, gold has a key role to play in preserving wealth in a world characterised by policy intervention, heightened risk and ongoing uncertainty.'

Markova, who runs the Smith & Williamson Global Gold and Resources fund alongside AA-rated Bob Lyon, points out the huge disconnect between the precious metal and gold shares has been as wide only at three points in the past decade, and that this has thrown up a compelling opportunity.

'While the increased cost of developing and operating mines means the price of the commodity is unlikely to slip beneath $1,500, gold shares have never been as heavily discounted and the macroeconomic backdrop could support a rally,' Markova (pictured) said.

The manager said low interest rates and broadened asset purchase programmes in the UK, US and possibly even Europe could push prices up.

'I am bullish precious metals medium to long term and believe [gold shares] can have a quick rebound,' Markova said.

'Last year we had the right call on commodities, both gold and silver, but the one thing we were really surprised about was the scale of the disconnect between equities and precious metal pricing. Equities correlated more with world markets, especially at times when everybody was running for the door.;

She added:'That disconnect creates a massive opportunity for the rational investor because we are looking at an environment where gold shares have stretched so far away from the commodity that investing in shares now gives you a very reasonably priced asset class trading on 8/9x cash flows and companies paying dividends,' the manager added.

'Before, all of these companies demanded higher premiums and we trading at around 2x their net asset value,' Markova continued.

There have only been two other points in the cycle in which gold shares have traded at their current heavily discounted level.  Gold shares were as cheap at the beginning of the cycle in 2001 and then at its depth in 2008.

While the cost of gold shares rivals its historic lows, miners' cash margins have improved dramatically over the years and investors are benefiting through acquisitions and dividends.

In 2011, Markova and Lyon correctly called the commodity market, but used their fund's maximum 10% physical gold allocation to capture the rapid rise in bullion's price.

The managers have since trimmed this back slightly, but would not be surprised if the price of gold went on to surpass its $2,500 record, achieved in the 1980s.

'I really think that if we inflation adjust the gold price, in US dollar terms, the previous peak was $2,500 and i think it's very realistic we are going to get there some time in the future...we may even surpass that,' Markova said.

Over three years to the end of December Lyon and Markova have delivered 110.19%, versus a 33% rise in the FTSE Gold Miners Index and a 64.2% increase in the FTSE AW/Mining TR Index.